Business Recordkeeping for Beginners
Updated November 24, 2007
When you start a business, you'll need to keep the tax man, banks, investors, customers, creditors, and owners happy by making sure that you have all the records you need to prepare financial statements and provide proof (especially to the IRS) that you really are keeping everything in order and reporting your income honestly. It keeps you out of trouble and helps you figure out what in your business is working and what isn't.
How to Keep and Organize Your Records
The first thing you'll need is a place to put all these records.
Hard copies can be filed in an accordion folder, file box, or filing cabinet. Hard copies have disadvantages, though, they are difficult to sort through, take up lots of room, and are easily lost or destroyed.
To retrieve your files quickly, store and organize them on your computer. Hard copies can be scanned and the images can be saved electronically. Electronic records can be kept in their original form, but computer software changes so frequently that it is possible that you won't have the program that opens that .xyz file after a few years, so you'll need to have copies that are more universal, such as text files (.csv and .txt) and image files (.bmp, .jpg, .tiff, .png). The IRS currently requires documents to be in image file format. Electronic media also changes frequently (some of us can remember programming our computers with punch cards and tape drives). Magnetic media can easily be erased. Optical media can get scratched. The best approach is to back up your records on a variety of media (hard drives are magnetic; CDs and DVDs are optical). As technology upgrades to a new medium, you should back up all of your document to that new medium. Even after you get rid of your hard copy documents (7 years or so from now), hang on to those electronic copies. They don't take up much room, and you never know when you'll need them.
Records to Collect and Keep
Fortunately, in the world of computers and Internet, you can quickly get most of these items from financial institutions online and keep copies of documents (such as invoices, receipts, etc.) that you've created on your computer. Thus, it is easiest to use checks, electronic payments, and credit cards for every transaction (even the little ones) rather than having to keep track of petty cash boxes and cash receipts. (I'm a huge fan of using credit cards for every transaction because you instantly have documentation, and you have additional protection for fraudulent activity as well as other benefits that come with premium cards.)
The key thing to remember is always get documentation for every transaction!
- Documentation of business expenses (purchases or payments you've made
for the operation of your business)
- Receipts
- Canceled checks
- Bank account statements
- Business checkbook or financial management or accounting software register
- Credit card statements
- Invoices
- Petty cash registers
- Asset inventory and depreciation sheet
- Payroll and employee compensation logs
- Documentation of purchases (purchases of items or raw materials that
you've made to produce your product or resell to the customer)
- Receipts
- Canceled checks
- Bank account statements
- Credit card statements
- Invoices
- Petty cash registers
- Documentation of gross receipts (sales, donations, or other money you've
received)
- Cash register receipts
- Copies of invoices you've sent customers / clients
- Copies of receipts you've sent customers / clients
- Cash register tapes
- Receipt books
- Electronic copies of electronic receipts
- Credit card charge slips
- Bank deposit slips
- Form 1099-Misc (which you receive from companies that have paid you)
- Documentation of taxes paid (federal, state, and local levels)
- Tax returns for every year
- Estimated tax forms
- Self-employment tax forms
- Employment tax forms
- Sales tax forms
- Excise tax forms
- Canceled checks or bank account statements to prove payment of taxes
How Long to Keep Records
To play it safe, keep business records for at least 7 years, even though the IRS says that in some cases you only need to save them for 3 years. (Note, if you file a fraudulent tax return or fail to file a return at all, the IRS can still come after you decades later, so first, always file your tax return, second, don't file fraudulent tax returns, and if you think he might be be questioned for not filing when you should have or fraudulently filing, the hang onto your records for that tax year in question forever.)
Also, check with your insurance companies, creditors, investors, etc. to find out if they require you to keep records longer. If you fear that you may be sued for any reason (whether or not you're doing anything wrong), save documents indefinitely.
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